02388cam a22002777 4500001000700000003000500007005001700012008004100029100001800070245009600088260006600184490004200250500001900292520112800311530006101439538007201500538003601572690007701608690012601685690008501811700002001896710004201916830007701958856003802035856003702073w15545NBER20171213214159.0171213s2009 mau||||fs|||| 000 0 eng d1 aEdmans, Alex.10aTractability in Incentive Contractingh[electronic resource] /cAlex Edmans, Xavier Gabaix. aCambridge, Mass.bNational Bureau of Economic Researchc2009.1 aNBER working paper seriesvno. w15545 aNovember 2009.3 aThis paper identifies a class of multiperiod agency problems in which the optimal contract is tractable (attainable in closed form). By modeling the noise before the action in each period, we force the contract to provide sufficient incentives state-by-state, rather than merely on average. This tightly constrains the set of admissible contracts and allows for a simple solution to the contracting problem. Our results continue to hold in continuous time, where noise and actions are simultaneous. We thus extend the tractable contracts of Holmstrom and Milgrom (1987) to settings that do not require exponential utility, a pecuniary cost of effort, Gaussian noise or continuous time. The contract's functional form is independent of the noise distribution. Moreover, if the cost of effort is pecuniary (multiplicative), the contract is linear (log-linear) in output and its slope is independent of the noise distribution, utility function and reservation utility. In a two-stage contracting game, the optimal target action depends on the costs and benefits of the environment, but is independent of the noise realization. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aD2 - Production and Organizations2Journal of Economic Literature class. 7aG34 - Mergers • Acquisitions • Restructuring • Corporate Governance2Journal of Economic Literature class. 7aJ3 - Wages, Compensation, and Labor Costs2Journal of Economic Literature class.1 aGabaix, Xavier.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w15545.4 uhttp://www.nber.org/papers/w1554541uhttp://dx.doi.org/10.3386/w15545